Stocks had a mixed but ultimately bullish week, even considering Friday’s dip. The string of better-than-expected earnings boosted stocks throughout the week. Although global politics caused wild swings in Europe and the economic weakness remained apparent, bulls are still in control on Wall Street. The fact that China did not sign the “phase one” trade deal despite last week’s announcement could also have triggered a pullback in equities. However, apart from a few brief periods, volatility remained muted. The Brexit deal between the European Union (EU) and the U.K. helped the mood as well, even though the British Parliament could still reject the agreement.
The key economic reports were mostly bearish this week, but thanks to the improving investor sentiment and positive earnings surprises, Treasury yields were virtually unchanged across the yield curve. The retail sales report provided the most significant negative surprise with core and headline sales, both coming in below zero. The Philly Fed Index and industrial production confirmed the soft patch in manufacturing, even though the Empire State Manufacturing Index was slightly better-than-expected. The housing market remained strong in September, according to the number of building permits and the NAHB Housing Market Index, although housing starts declined by more-than-expected.
The technical picture remains clearly bullish, despite the choppy price action on Wall Street, with the major indices all confirming the positive short-term trend change. The S&P 500, the Nasdaq, and the Dow are each still well above their rising 200-day moving averages, and the benchmarks also closed above their now rising 50-day moving averages on Friday. Small-caps remained strong throughout the week, and even though the Russell 2000 is still well below its all-time high, its current relative strength is a great sign ahead of the last two months of the year. The Volatility Index (VIX) remained stable despite Friday’s brief sell-off, as it closed the week near 15, close to its lowest level in two months.
Market internals improved significantly thanks to the performance of small-caps, and all of the key measures continue to confirm the ongoing bull market. The Advance/Decline line continued to hit new bull market highs, as advancing issues outnumbered decliners by a 3-to-1 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 62 on the NYSE and 38 on the Nasdaq. The number of new lows declined again in the meantime, dropping to 26 on the NYSE and 57 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to increase, despite the mixed headlines, as the indicator closed the week near 55%, at its highest level in over a month.
Short interest declined significantly this week, as volatility remained low, and the most-shorted issues outperformed virtually all segments of the market thanks to the short squeeze. Revlon (REV) continued to consolidate near its recent multi-month high, and with its short interest still at 54%, the stock could be ready for another leg higher. Iron Mountain (IRM) hit a two-month high thanks to the improving sentiment, and since the stock sports a very high days-to-cover (DTC) ratio of 16, it could be headed even higher in the coming weeks. Digital Realty Trust (DLR) hit a new all-time high this week, and it continues to show relative strength, which together with its DTC ratio of 14, is bad news for bears.
We have a relatively calm week ahead in terms of economic releases, with the most important indicators all coming out on Thursday. The durable goods report, the Markit manufacturing and services PMIs, and new home sales will all be released on Thursday, while existing home sales and the Richmond Manufacturing Index will highlight Tuesday’s session. With the Fed’s next meeting scheduled for the last week of the month, volatility could be muted next week, but the Brexit saga may provide further surprises, and investors will be closely watching the key quarterly earnings reports as well. The numbers from Microsoft (MSFT) and Amazon (AMZN) will likely have the biggest impact on the broader market, but Visa (V), Intel (INTC), and the Procter & Gamble (PG) also have the potential to cause significant moves. Stay tuned!
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